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Petrochemical Industry in India: Determinants, Challenges and Opportunities

Article · March 2018

DOI: 10.31031/PPS.2018.01.000510

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 Progress in Petrochemical Science
CRIMSON PUBLISHERS
C Wings to the Research

ISSN 2637-8035 Mini Review

Petrochemical Industry in India: Determinants,

Challenges and Opportunities
Mohd Hussain Kunroo* and Keshav Soni
Department of Economics, Central University of Rajasthan, India

*Corresponding author: Mohd Hussain Kunroo, Assistant Professor, Department of Economics, Central University of Rajasthan, Bandarsindri, India.
Submission: February 05, 2018; Published: March 14, 2018

Abstract

Petrochemical sector is no doubt, vital for the stimulation of economic growth and development of any country, and India is not an exception. This
sector needs more government assistance in technology expansion, and financial help in order to grow faster and compete with global competitors.
This article presents the current scenario of the Petrochemical industry in India. It highlights nature, sources of technology and key challenges that this
sector is going to face in the near future.

Introduction
Petrochemical industry plays a vital role in the economic
growth of a nation. They supply basic and useful raw materials to
the other industries and final goods to the individual consumers.
Nowadays, petrochemical products influence the entire life and
cover almost every area such as housing, clothing, agriculture,
horticulture, furniture, construction, automobiles, irrigation,
medical equipment, electrical and electronics, etc. Petrochemical
products are derived products of several chemical materials. More
specifically, hydrocarbons are the main chemical components of
petrochemicals, which, in turn, are derived products of natural
gas and crude oil. Also, the main feed stock for the petrochemical
industry is kerosene, naphtha and gas oil. Recently, unconventional
feed stocks such as shale gas, coal, coal bed methane (CBM), pet
coke, etc. have also been used [1]. Other important feed-stocks used
in the industry are propane, ethane, butane and Natural Gas Liquid
(NGL) which are by-product of the natural gas. The basic but major
raw materials from which most of the chemicals are derived are
olefins (ethylene, propylene & butadiene) and aromatics (benzene,
toluene and xylene). Olefins and aromatics are the primary building-
blocks for a wide range of articles such as detergents, solvents
and adhesives. It should be noted that Olefins form the basis for
polymers and oligomers used in plastics, resins, fibers, elastomers,
lubricants, and gels.
The basic question is: Is there any economics involved behind
the manufacturing locations of petrochemicals? Yes. The answer
lays in the fact that Petrochemical manufacturing units work on the
idea of integrated manufacturing from all those groups of related
materials that are often made in the nearby manufacturing plants
with the only intension to induce industrial symbiosis as well as
material and utility efficiency and other economies of scale.
The economic reforms initiated in 1991 in India brought about
a significant change in domestic petrochemical industry through
opening up of the economy and adopting liberalized policies. That
allowed market forces to adjust automatically and achieve the
desired level of growth and level of investment. It is now globally
accepted that consumption of ethylene and consumption of polymer
in the downstream plastic articles have strong correlations with
the growth of gross domestic product (GDP) of India. Consumption
of these articles has forward and backward linkages as well as
has multiplier effect on the GDP growth of India. On the one
hand they provide materials to the agriculture, automobiles, and
manufacturing, etc. And on the other hand they provide direct and
indirect job opportunities. These linkages ensure further increase
in the GDP growth leading to better quality of life.
Current Status of Petrochemical Sector of India
In this globalized world, Petrochemical industry plays a
prominent role in the economic growth and development of a
sovereign nation. India is spread over a land mass of around
3.17million square kilometers with a population of over 1.22billion.
Such economic characteristics lend it the character of a rapidly
growing economy. Besides, it has a well-developed Processing and
Manufacturing Industry related to the field of petrochemicals as it
has 4 naphtha based and 4 gas based cracker complexes. Together,
their ethylene capacity is 4.00 million MT (metric tons) annually.
Besides these India also has 6 aromatic complexes with a combined
Xylene capacity of 4.45million MT. Out of the total production of

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 Progress Petrochem Sci Copyright © Mohd Hussain Kunroo

major petrochemicals the production of polymers account for a growth rate of 10.80%. The utilization of plants was 84% of total
about 59.32% [2]. installed capacity. This Table 1 also shows that there is marginal
increase in installed capacities of synthetic fibers, polymers and
As Table 1 shows India’s total installed capacity in 2015-16equals
performance plastics where as elastomers and synthetic detergent
17,702 thousand metric tons, in 2014-15 the growth rate of installed
intermediates installed capacities remained same. Growth rate of
capacity was 4.02% and in the year 2015-16 it was 5.40%, whereas
all the products- except performance products- was negative in
total production in 2015-16 was 14,900 thousand metric tons, with
2008-09 due to the global slowdown.
Table 1: Production, Installed Capacity & Growth of Selected Basic Major Petrochemicals (Group-wise) during 2008-09 to 2015-16 [5].
(Figures in thousand MT)

Installed capacity Production/ 2008- 2009- 2010- 2011- 2012- 2013- 2014- 2015-
Group
2013-14 2014-15 2015-16 Growth Rate 09 10 11 12 13 14 15 16

Production 2479 2835 3123 3105 3124 3144 3527 3554

Synthetic
3854 4298 4307 Growth rate
Fibers -6.8 14.4 10.2 -0.6 0.6 1.3 12.2 0.8
(%)
Production 5060 5695 6343 7250 7509 7876 7558 8839
Polymers 8905 8905 9768 Growth rate
-4.6 12.5 11.4 14.3 3.6 8.6 -4 17
(%)
Production 96 106 105 100 96 105 172 242
Elastomers (S.
244 425 425 Growth rate
Rubber) -8.5 10.4 -0.7 -4.7 -4.2 4.1 64.1 40.8
(%)

Synth. Production 552 618 638 623 627 597 596 566
Detergent 687 687 687 Growth rate
intermediate -5.7 12 3.3 -2.4 0.7 -4.2 -0.1 -5.1
(%)
Production 124 1641 1740 1677 1691 1685 1591 1700
Performance
2454 2479 2514 Growth rate
plastics 8 23.9 6 -3.6 0.8 0.5 -5.5 6.9
(%)

Total Basic Production 9511 10895 11950 12755 13047 13406 13443 14900
Major 16144 16794 17702 Growth rate
Petrochemical -3.7 14.5 9.7 6.7 2.3 2.7 3 10.8
(%)

Factors that shaped this market trend are as follows
Increase in global demand
As market surges after 2008-09 crisis, demand for
petrochemical products grew as well. This surge in global demand
is supplemented by price decrease of crude oil. The consumption
demand for 30 plus commodity chemicals and plastics from the
whole world was about 1,128 million metric tons in 2016. In
future, this demand is expected to grow at a mean rate of about
3.5% over the next five years, which amounts to over 1300million
metric tons. This 3.5% rate coincides with 2011-2016 period rates.
In this historical period, such rate stood at 3.4% level. Across the
world; it is believed that ethylene demand will increase at a CAGR
of 5-6% and propylene demand at a CAGR of 5.5% for the period
2014 through 2018. Both will continue to have a significant share
of about 70%-75% of overall petrochemical demand.
percent demand growth. West Europe’s chemical demand growth is
projected to grow slowly because the structural issues are affecting
the broader economic outlook. Even India’s domestic demand is
increasing for the petrochemical products. These future concerns
led petrochemical industry to expand the capacity to meet the
expected future demand rise.
Increase in industrial demand
IIP registered a 25 months high growth rate of 8.4% of
manufacturing growing at 10.2% in Nov. 2017. Higher growth in
capital goods, construction and consumer non-durables have had
a significant impact. Rapid growth in service sector causes demand
for office spaces. The per capita electricity consumption of India
increased, and it stood in 2014-15 at 1010Kwh. These estimates
clearly show that growth of industrial sector that prompt the
growth of petrochemical industry.

Capacity expansion Technology trends:

As per an estimate, 37% of world demand will be in China by
2021 (Reference). The theory of gravity model of international
trade suggests India can fill the gap of demand and supply in
China with a lower transportation and manufacturing cost. The
Middle East, North America and others comprise the remaining 50
Because of technical innovations in the petrochemical sector,
the usage of low density polyethylene is vastly replaced by the
linear low density polyethylene in India. Only 1ton of ethylene
is required to produce 1ton of linear low-density polyethylene
(LLDPE) whereas more than 1ton of ethylene was required to

Volume 1 - Issue - 2
How to cite this article: Mohd Hussain K, Keshav S. Petrochemical Industry in India: Determinants, Challenges and Opportunities. Progress Petrochem Sci
2/5
. 1(2). PPS.000510.2018. DOI: 10.31031/PPS.2018.01.000510
 Progress Petrochem Sci Copyright © Mohd Hussain Kunroo

produce 1ton of LDPE. India’s ONGC Petro additions Limited (OPaL)
started its two HDPE (high-density polyethylene)/LLDPE swing
units with nameplate capacities of 360,000 tons/year each and a
340,000 tons/year stand-alone HDPE facility in the February of
2017. India’s Reliance Industries limited was also expected to start-
up its LDPE and LLDPE/HDPE units with a combined capacity of
1.1m tons/year in the first half of 2017.
Nature of Research and Development (R&D) in India
The chemical sector of India, from its very beginning, has
regarded science and technology (S&T) as a substantial contributor
to its economic growth. The scientific knowledge applied in the
production activities of India vary from sector to sector. Generally,
sources of technology are domestic in nature in smaller or
downstream petrochemical companies. This is contrary to medium
and large scale companies where technologies are imported
from overseas agencies. Petrochemical industry is oligopolistic
in nature as it has 4-6 major players, so this sector contains large
scale companies where technology are imported from foreign.
Almost 84% of chemical sector R&D expenditure is borne by the
firms dealing with knowledge intensive chemical sector with
drugs/pharma accounting for almost 60% of this expenditure.
The basic chemical sector requires R&D for its manufacturing
process enhancements to control and reduce expenses and to
promote downstream application demand in the market. This
sector is yet to optimally utilize R&D for process intensification
and to achieve environment friendly processing. The specialty and
knowledge intensive chemical sectors require R&D for product
improvement as well as have scope for process innovations for
cost savings. And in order to promote the quantity and quality of
petrochemical sector, several steps and schemes has been taken by
the Government of India. These schemes comprise tax relaxation
of up to 200% to petrochemical sector if it outsources projects to
academic institutions. However, such steps have not proved much
fruitful, as the impact of these schemes on Indian petrochemical
sector has been marginal. [3]
Technological Choices Available to the Petrochemical
Sector of India
The policies pursued after liberalization significantly enhanced
the choices to access the best technology from their foreign
counterpart.
i. Firm size has most significant impact on technological
choices. These technological choices are limited to large
petrochemical companies. In plastic industry most of the firms
are medium-and-small enterprises (MSE) and doesn’t have
enough earning to spend on technological advancements [4]
ii. According to the report entitled Chemicals &
Petrochemicals Statistics at a Glance (2016) [5], the odds in
favor of licensing foreign technologies and hence combining
them with their R&D efforts has increased because of Foreign
Equity participation.
Determinants of R&D Expenditures in Petrochemical
Industry in India
i. Retained earnings-no firm wants to lose their earnings on
paying interest on a project whose outcome is uncertain and
awaited for an uncertain period of time [6]
ii. Competitiveness-petrochemical firms in India share
oligopolistic market power where price remains same or rigid.
So degree of competition does not force them to expand a
significant amount of their earnings on R&D. The competition
from foreign firms is also not significant because firms in
petrochemical industry are either private or semiprivate [7]
iii. High Sinking Cost-failure of R&D projects can lead to
a significant amount of losses to the stack-holders, so firm
believes more in importing the technology which is tested.
Innovation Climate in Other Countries Vis-À-Vis India
Table 2: Innovation ecosystems in 5 countries, 1996 [8].
South
Singapore Malaysia India Brazil
Africa
Density
of R&D
scientists
1 56.3 5.1 8.24 20 7
(No per
10000
labor)
US patents
2 54(37) 7(0) 22(50)* 67(28) 37(35)
granted
High-tech
3 Exports 55.7 44.4 6.9 5.7 6.25
(%)
Note: numbers in parenthesis indicate % share of local companies
*Local companies + R&D institutes
In Table 2 above [8] made a comparative analysis of the impact
made by national S&T policies (fiscal and non-fiscal) of south
Africa, Singapore, India, Malaysia and Brazil on the innovation in
manufacturing firms considering various components of their
cognizance generation systems. Fiscal measures consist of two
important economic actions: (1) tax incentives directed to promote
investments in the area of Research and Development (R&D); (2)
grant-in-aid for research projects of industrial relevance. Non-
fiscal measures include: (1) creation and generation of human
resource development through skill development; (2) industry-
academic linkages through various means such as memorandum of
understandings (Mo U), etc. Recognizing the role of R&D scientist’s
and advanced-technology content of their export products and their
innovation policies, he concluded that Singapore has an effective
innovation policy. This policy has been maintained by the Singapore
Government to raise its research intensity. Even though Malaysia
and South Africa have established a variety of research grants to
brace R&D projects, still they have not been successful in making
a major impact due to shortage of appropriately qualified human
resource. Though Brazil and India have a vast pool of Science and
Technology (S&T) manpower and research infrastructure, their

Volume 1 - Issue - 2
How to cite this article: Mohd Hussain K, Keshav S. Petrochemical Industry in India: Determinants, Challenges and Opportunities. Progress Petrochem Sci
3/5
. 1(2). PPS.000510.2018. DOI: 10.31031/PPS.2018.01.000510
 Progress Petrochem Sci
availability is not adequate to manufacturing companies for doing
R&D. They need to work on their non-fiscal measures. Following
observations, which were applicable for 1978-99 periods, are still
relevant for India:
i. Poor administration of direct and indirect tax incentives
on R&D: In every budget government raised the incentives to
the petrochemical sector but poor administration; high ladders
to get the benefits make the facilities less attractive for the
producers.
ii. Research grants are aimed at technological self-reliance
and not global competitiveness: In India grants to major players
like Indian petrochemical cooperation limited is not much
higher. They can increase the production but cannot compete
with the foreign majors. These less grants are resisting these
sectors competitiveness.
iii. Non-fiscal instruments need to be strengthened: Non-
fiscal instruments such as patents, licensing, and copyright
policies are still a subject of discussion in Indian context
because last amendment in Indian Patent Law was in 2005.
Key Challenges
i. Volatility of raw material prices: India has 4 naphtha based
cracker complexes. Naphtha is a crude oil derived product. The
prices of crude oil witnessed a significant volatility, thereby
making petrochemicals prices highly volatile.
ii. Increased competition from abroad: Over the time, the
production capacity has been increasing incessantly in ethane
rich Middle East and shale gas rich US. Such a production (Shale
gas) edge to the US has generated a competitive advantage to
the US petrochemical sector. For instance, out of the 30million
tons of ethylene capacity additions expected during the period
2014 and 2018, 12.5million tons were expected in the US alone.
Since, ethane and shale gas based petrochemical products
are cheaper than petrochemical products in India domestic
producers are expected to witness margins pressure [9]
iii. Limited capacity of petrochemical intermediate sector: As
several growth reports suggested that India’s projected growth
is high so the demand for petrochemical products will increase
over time. Petrochemical sector uses acetic acid, acrylic acid and
propylene oxide as intermediary products. The compatibility to
keep up the production with demand is not very good [solving
the puzzle of India’s petrochemical-intermediate shortfall [10].
iv. New reserves discovery: Crude oil is a natural resource
so its supply is limited. To keep the sector competitive, Indian
firms need to find new reserves. Already, the search initiative
has been taken by Oil and natural gas corporation (ONGC) for
such reserves in the Indian Ocean.
v. Pollution: Petro products, for example plastic, Vaseline
etc. are derived from natural products namely crude oil,
natural gas or uses natural resources as inputs. Extraction and
How to cite this article: Mohd Hussain K, Keshav S. Petrochemical Industry in India: Determinants, Challenges and Opportunities. Progress Petrochem Sci
. 1(2). PPS.000510.2018. DOI: 10.31031/PPS.2018.01.000510
Copyright © Mohd Hussain Kunroo
production cost must be determined or adjusted according to
environmental pricing principles such as Pigovian taxation,
Coase Principle, etc. [11]
vi. Effective regulation through a proper institution: Natural
resources are wealth for a country, particularly when such
resources are scarce in quantity. So every country wants them
to regulate as per the rules to maintain intergenerational equity.
Hence, India needs a legal autonomous institution to regulate
this sector.
vii. Budgetary allocation: Allocations in budget is still far less
than other sectors. So policy makers need to target this sector
as well.
viii. Poor infrastructural facilities: India has poor physical
infrastructure and even pace to construct these basic facilities
for business is very limited [9]
ix. Uninterrupted power supply: In India rate of growth of
power generation is not same as the growth rate of demand.
So Indian petrochemical sector faces interrupted power supply
and unexpected power cuts. This power problem/shortage of
power is a key challenge for developing country like India which
is facing high competition from China, Brazil, and Singapore [9].
Conclusion
This is evident from changing market structure of petrochemical
industry that to meet the global demand and competitiveness Indian
petrochemical industry need policy boost up through strengthened
administration, revival of non-fiscal and fiscal instruments to
incentivize more research and development (R&D) projects. India
needs skilled labor force to grab the benefits, and in order to do
so we need more specialized academic institutions such as Central
Institute of Plastic Engineering& Technology (CIPET) because
Academic participation in R&D has a multiplier effect.
References
1. Sateesh K (2015) A Brief Report on Chemical and Petrochemical
Industry in India. ASA & associates, Hyderabad, India.
2. AIPC (2017) Indian petrochemical industry review of 2016-17 &
outlook for 2017-18. AIPC 2017 Country Paper from India. Chemicals
and Petrochemicals Manufactures Association, Asia Petrochemical
Industry conference, Japan.
3. Raghavan (2011) R&D Impact on Indian chemical industry. Indian
National Academy of Engineering, New Delhi.
4. FICCI (2014) Potential of Plastics Industry in Northern India with
special focus on Plasticulture and food Processing-2014. A Report on
Plastics Industry, Tata Strategic Management Group, India.
5. Government of India (2016) Chemicals & Petrochemicals Statistics at a
Glance: 2016. Government of India, Ministry of Chemicals and Fertilizers.
6. Hay DA and Morris DJ (1991) Industrial Economics and organization:
theory of evidence. Oxford University Press, India.
7. Arrow K (1962) Economic welfare and allocation of resources for
invention. Economic and Social Factors, NBER, Princeton University
Press, USA.
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 Progress Petrochem Sci Copyright © Mohd Hussain Kunroo

8. Mani S (2002) Government, Innovation and Technology Policy: An
International Comparative Analysis. Edward Elgar Publishing Limited,
Cheltanham, England, UK.
9. FICCI (2014) Handbook on Indian Chemicals and Petrochemicals Sector.
10. Goyal A, Kotecha S, Simons TJ (2015) Soling the puzzle of India’s
petrochemical-intermediate shortfall. McKinsey and Company, USA.
11. Coase RH (1960) The problem of social cost. The Journal of Law &
Economics 3: 1-44.

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Volume 1 - Issue - 2
How to cite this article: Mohd Hussain K, Keshav S. Petrochemical Industry in India: Determinants, Challenges and Opportunities. Progress Petrochem Sci
5/5
. 1(2). PPS.000510.2018. DOI: 10.31031/PPS.2018.01.000510

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